Takeovers

What Will Warren Buffett Buy Next?

Warren Buffett has a cash hoard of almost $40 billion and wants to spend it on major acquisitions. The "elephant gun has been reloaded, and my trigger finger is itchy," the 80-year-old chairman of Berkshire Hathaway (BRK.A) said in his annual letter to shareholders on Feb. 26.

Buffett typically prefers "simple" businesses with pretax profit exceeding $75 million, "consistent" earning power, and "good" returns on equity while employing little or no debt, he says in his report. He has shifted his takeover strategy as Berkshire focuses on "capital intensive businesses" that require investment in infrastructure and equipment, such as power producers and railroads. Investors such as Buffett prefer to buy companies when their valuations are low by historical standards. Last year he made his largest purchase, paying $26.5 billion for Burlington Northern Sante Fe railway. Buffett didn't respond to a request for comment.

General Dynamics (GD), the maker of Gulfstream business jets and Abrams tanks; Exelon (EXC), the biggest U.S. nuclear power generator; and Archer Daniels Midland (ADM), the world's biggest grain processor, are among 45 companies that meet the acquisition criteria listed in Buffett's annual letter, according to data compiled by Bloomberg. "He's probably looking for something along those lines," says Barry James, who oversees $2.5 billion as president of James Investment Research in Xenia, Ohio. "Obviously we're going to need defense, energy, and agriculture."

Buffett owned a stake in General Dynamics more than a decade ago. Its net income rose 19 percent in the fourth quarter as demand for Gulfstream jets rose, and Chief Executive Officer Jay L. Johnson says the aerospace unit will increase sales at least 10 percent this year. Rob Doolittle, a spokesman for General Dynamics, declined to comment.

ADM could appeal to Buffett because it excels at transporting and storing food and grains, "a very difficult business to replicate," says Brian M. Barish, president of Cambiar Investors in Denver. One thing that might deter Buffett is that in 1996 ADM agreed to pay a then-record $100 million antitrust fine after the government accused it of price fixing. Buffett's son, Howard Buffett, joined ADM in 1992, serving as a director and head of investor relations. He resigned in July 1995 because he was unhappy with the company's actions related to the investigation, The Wall Street Journal reported at the time. Roman Blahoski, a spokesman at ADM, declined to comment.

Exelon may be a target as Buffett looks to add to his stakes in utilities and power producers, according to Harry Rady, who oversees $270 million as CEO of Rady Asset Management in La Jolla, Calif. Exelon trades at 10.1 times earnings, compared with its five-year average of 14.7. "It's out of favor," says Rady. "That would be one that would be right up his alley." Exelon spokesman Paul Elsberg also declined to comment.

Buffett could consider adding another insurer to his stable. Chubb (CB), Travelers (TRV), and Allstate (ALL) are all trading below their historical valuations based on book value, according to Paul Newsome, an analyst at Sandler O'Neill + Partners. Buying an insurer "definitely makes sense," he says.

The bottom line: Bloomberg data show 45 companies that match up with the takeover goals Buffett outlined in his latest shareholder letter.